New Banking System

Banking and Finance DLC for Capitalism Lab
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Re: New Banking System

Post by counting »

therealevan wrote:The "Loan to Corporations" feature is what I'm eye balling, definitely a much needed item.
Well, AIs rarely take loans if you watch them closely, so perhaps it's not as easy as it seems. And those AIs taking loans, are usually heavily in debt with negative net profit, loan to corporations might be more risky than you think. Perhaps AI should be improved when they start with low capital and willing to take loan to expand business, or during "business expansion" phase, even make AI smart enough to dig itself out of the trouble with "gamble to expand or die" risky behaviors.

Also some restrains with issuing shares to public might be called for. Not every citizen would put their money in purchasing stocks, and the availability of capital directly from public should be limited. More capital should flow through banking channel, like it does in real life, making banking business serves a real purpose in game, channeling capital from citizen's savings deposit.
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therealevan
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Re: New Banking System

Post by therealevan »

counting wrote:
therealevan wrote:The "Loan to Corporations" feature is what I'm eye balling, definitely a much needed item.
Well, AIs rarely take loans if you watch them closely, so perhaps it's not as easy as it seems. And those AIs taking loans, are usually heavily in debt with negative net profit, loan to corporations might be more risky than you think. Perhaps AI should be improved when they start with low capital and willing to take loan to expand business, or during "business expansion" phase, even make AI smart enough to dig itself out of the trouble with "gamble to expand or die" risky behaviors.

Also some restrains with issuing shares to public might be called for. Not every citizen would put their money in purchasing stocks, and the availability of capital directly from public should be limited. More capital should flow through banking channel, like it does in real life, making banking business serves a real purpose in game, channeling capital from citizen's savings deposit.

I was thinking for me personally, I use loans, but the non-fixed rate and a principal that isn't paid down unless you manually make a payment is a real deal breaker.
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Re: New Banking System

Post by counting »

therealevan wrote: I was thinking for me personally, I use loans, but the non-fixed rate and a principal that isn't paid down unless you manually make a payment is a real deal breaker.
Well since I mostly turned on inflation (or reverse), paying back principal most of the time isn't such a good idea, especially when inflation rate is higher than interest rate. But with banking mechanism mostly reworked, payment methods could gain more options as well. And since there's time deposit, time loan shouldn't be that hard to add in.
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Re: New Banking System

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Since this mechanic will be included within city simulation expansion, I was thinking maybe a local government bond and central government bond mechanics can be integrated into banking system.

When a local government issuing bonds to gather fund, it goes to the public, the invisible central government also issue bonds, and held by central bank. When there are excess reserve for banks, the excess will automatically be used for purchasing central government bonds. And bankers can choose to covert them to local government bonds by buying from the public if they see local government bonds have higher yield (sort of like buying from a seaport, a limited but more lucrative asset investment). This way the financial foundation will be linked between government system and banking system. Also it would provide a safety net for banks when a large withdraw causing its reserve ratio drop below reserve requirement, the bond holding will be sold back to central government, or if a bank doesn't hold any with pure loans as assets, it will face penalty interest/fee when it fails reserve requirement (in real world there is overnight rate, when banks borrowing from each other, or borrowing from the central bank itself, but this mechanic mimic the punishment in a similar way).
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David
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Re: New Banking System

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If allowing corporations partake in banks as well as manufacturing sectors, what would happen if players use deposit gathered from citizen to invest manufacturing instead of providing mortgage?
Unlike other types of firms in the game, which do not have their own balance sheets (as they are merged with the corporate balance sheet), a bank will have its own balance sheet.

Here are the details of how the design:
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Re: New Banking System

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David wrote:
If allowing corporations partake in banks as well as manufacturing sectors, what would happen if players use deposit gathered from citizen to invest manufacturing instead of providing mortgage?
Unlike other types of firms in the game, which do not have their own balance sheets (as they are merged with the corporate balance sheet), a bank will have its own balance sheet.

Here are the details of how the design:
I see the use of Capital Strength, and understand its check balance purpose as a game mechanic, but the weights in RWA is not something fixed, otherwise it will force every bank to seek low risk assets (low risk customers), than higher ones. But assessing risk is something quite difficult to do in game, without rating agencies or some sort of credit rating assessment mechanics. Think about a bank trying to attract AI loans, and set corporation loan interest rate low, but it will be forced to held certain amount of mortgage or it can't get enough capital strength to attract more capital, or forced to raise the deposit interest to attract deposit. So in turn either with more expenses, along with less income, or choose to hold mortgage first. Hence loan to corporation strategy will be second options, unless the mortgage market share has been saturated than banks will be forced venture into higher risk loans with less profit margin. I think these weight needs to be adaptive variables with other indexes, like when unemployment is high, housing supply over demand too much, the risk of mortgage risk will increase, and when business is booming and market interest rate is low the loan to local business will be lower. The real difficulty will be assessing corporation loans. That's something I believe with extremely high risk when there's no proper rating mechanics to determine it. Other options might be make these weights be something can be influenced by local government decisions, or some sort of central bank policies or economic trends (housing boom/bubble, etc).

BTW, I see there is a Fee and commission income item, does it means we will have OBS services mechanics provided by banks?
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Re: New Banking System

Post by Arcnor »

Two of the largest purchases individuals make are buying their house and buying their car. Having mortgages are great, but I also think we should also offer Auto loans. This can provide another loan products for banks to offer. A key driver of automotive sales is financing and what rates customers can get. Perhaps offering an auto loan that is driven by what rates the bank can offer and have this also directly impact auto sales. Rates go up, auto sales go down, etc.
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Re: New Banking System

Post by Nazka231 »

Auto loans would be a little bit too much I think. There are more things to expand just in the banking ecosystem with IB, government and municipal bonds, the rate of money by the central bank and its rate, etc..

I want to add that there is one of the most important macro value here, in the US it is the Federal funds rate. This rate has a big impact on any other rate between 1m to 5y. We can see it in action right now with the Fed that needs to increase it to avoid bubbles because it is so cheap to invest. And so opposite on the EU side where they are lowering it at the maximum to increase investment. This has to be linked with the political feature because if the Fed (or others) can impact a lot the economy through this rate, their power has still a limit. We can see that for instance with the 5y to 30 US bond not being impacted, or the bad situation in Europe where you have an big export country -Germany- while other countries has neutral or even total at the opposite -so import- economy. And in this situation the only power is in the EU not the Central Bank with new fiscal laws etc.. See Ben Bernanke blog. [1] For even more info you have a 4 part blog [2] about the role of the Fed, and a YouTube playlist [3] by him.

[1] Ben Bernanke's blog. Really great. http://www.brookings.edu/blogs/ben-bern ... us-problem
[2]http://www.brookings.edu/blogs/ben-bern ... tes-so-low
[3]https://www.youtube.com/playlist?list=P ... 2430469B34
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David
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Re: New Banking System

Post by David »

In the current version, the loan rate is determined by the central bank. Since there is only one commercial bank, the commercial bank's interest rate is always the same as the loan rate set by the central bank.

For the new banking system, there will be multiple commercial banks.

Each bank can set its own loan interest rate, as described in this post:
http://www.capitalismlab.com/forum/view ... 497#p11663

In the new banking system, the central bank will set an official benchmark interest rate and individual banks can set their own interest rates based on it.

There are a couple issues to be discussed:
1) Do you think that we should call it "Federal fund rate", which is the term coined by the US Federal Reserve or use a more generic name like "official bank rate" ? (http://en.wikipedia.org/wiki/Bank_rate - different countries use different names for this.) Or any other name that you may suggest?

1) Do you think there should be a range limit for setting the loan interest rate at the individual commercial bank level? Like -2% to +2% of the central bank's official bank rate. Or there shouldn't be any limit and let the market dynamics work out on its own?
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Re: New Banking System

Post by counting »

David wrote:In the current version, the loan rate is determined by the central bank. Since there is only one commercial bank, the commercial bank's interest rate is always the same as the loan rate set by the central bank.

For the new banking system, there will be multiple commercial banks.

Each bank can set its own loan interest rate, as described in this post:
http://www.capitalismlab.com/forum/view ... 497#p11663

In the new banking system, the central bank will set an official benchmark interest rate and individual banks can set their own interest rates based on it.

There are a couple issues to be discussed:
1) Do you think that we should call it "Federal fund rate", which is the term coined by the US Federal Reserve or use a more generic name like "official bank rate" ? (http://en.wikipedia.org/wiki/Bank_rate - different countries use different names for this.) Or any other name that you may suggest?

1) Do you think there should be a range limit for setting the loan interest rate at the individual commercial bank level? Like -2% to +2% of the central bank's official bank rate. Or there shouldn't be any limit and let the market dynamics work out on its own?
1) Actually it's not a set rate, but more like a "target rate" in practice. In most countries the board members of central bank are bankers themselves, mixed with appointed officials (politicians). They convey meetings to set a target rate within a range where most major banks within their control would accept. And base on "political agenda" it can be higher or lower. A lot of time the "target" doesn't work at all, if local banks don't have extensive business with the central bank. In EU, due to this nature, only a statistic rate is important than any single agency can set a "target". Like the BOEBR doesn't have much impact at all and is not analog to Federal fund rate (Bank of England is just a relative small part of a much larger financial structure). In a lot of the countries, the discount rate is more often used, due to it's a set rate, where policy can influence directly. Most central banks not only use these target/discount rates, but a lot of different kinds of open market operations (OMO), but since we don't have a financial market to begin with, I guess there are limited options (well, another OMO within the new banking mechanism is changing reserve level/ratio, thus affect money supply, but very uncommon in real world).

2) In real world, target rate is just a target, whether or not banks follows it depends on open market. But in the game, I wonder whether there will be enough banks and corporations entities to form a somewhat stable financial structure. In real world it's hundreds not thousands of different banks and millions of corporations within a country, compare to just dozens combined in the game. It would be interesting to see how a more agent based banking system would form with such few agents. I know mathematically most models can reach equilibrium (some might be unwanted equilibrium) eventually, but not quite sure how feasible to implement them in game mechanics (how often will they fall off the wages, so to speak). The restrain is meant for preventing simulation going out of control too often, right? Seems artificial, but is probably unavoidable. In Capitalism game term, we probably need a mature B2B interbank mechanism in place, if a completely free open market determined interest rate could form by itself.

BTW I think we need to consider loan to SME (local businesses) separate issue besides corporation loans and household loans. How huge the local businesses loans consists? How it resembles loans to households? What's the difference? What kind of model does it use, certainly not going to be the same as more agent-based AI corporate loans, but have to be similar enough.
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